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Women Can Teach Us A Thing or Two About Finances

OCEAN CITY — Women today are economic powerhouses. They now own 40% of America’s privately owned businesses and hold half its wealth — estimated to be $11 trillion of a total $22 trillion by 2020. Two in 10 married women outearn their husbands, and over the course of a family’s life, 90% of women will control its wealth.

It’s no surprise then that women’s behavior as earners, investors and savers is the subject of a large and growing body of behavioral economic research, which has yielded important findings. For example, when women do invest, they tend to look for informed advice and thus may have a better rate of return than men.4,5 But women can also be too conservative in their approach, especially given the fact that they tend to live longer than men. Ultimately, from the way they seek financial information and advice to their understanding of the long term, women’s financial behavior holds crucial lessons for all investors, regardless of gender.

Research shows that while men tend to overestimate their financial competence, women seek information: They get help, and compile data upon which to base informed decisions. In a large 2011 study, Spectrem Group, a private research firm, found that 46% of affluent and 82% of very high-net-worth women rely on financial advisors. Furthermore, they demand clear, in-depth facts from those advisors before acting.

The result of getting informed investment advice? Annual returns that are two percentage points higher a year versus those of people who didn’t seek experts’ input, according to one study.

Men, by contrast, "are substantially more overconfident about their relative performance," notes an often quoted study on gender and behavior in the Quarterly Journal of Economics.6 Yet another study notes that instead of backing off, they’re "more likely to see a risky situation as a challenge."

Women also tend to limit their trading far more than men do. They prioritize protecting principal rather than taking risks to grow their assets (6 in 10 wealthy women surveyed by Spectrem made that choice). A study by the University of Michigan’s Retirement Research Center found that men frequently and unnecessarily trade their holdings (what it called "disproportionate portfolio churning"). All other things being equal, the male participants traded 56% more than their female counterparts, and the more they traded, the worse their performance became — "a result of a too-rosy estimation of their own investment skills," the researchers wrote. One reason for the inferior returns was the triggering of fees.

A landmark study on gender differences in stock investing also found that men tended to sell too early, or to swap assets for new ones that underperformed what they had sold. The women, by contrast, were more inclined to take the long view, understanding that performance in many cases is best measured over time.

By the same token, different financial periods can call for different approaches. For example, the current low-growth environment in the U.S. may require a more active mentality when it comes to investing. Luckily, this is where women’s aforementioned penchant for seeking informed advice before making financial decisions can help them.

A nationwide Society of Actuaries study found that women expect to need more money during their later, less active stages of retirement than in the earlier portion, whereas men are less willing to acknowledge the costly physical and health challenges that may lie ahead. That could be one of the reasons women tend to be less optimistic than men regarding financial outcomes and to prepare for hard times in a constructive way. During the recent recession, the Society of Actuaries study found that women of all income levels reduced purchases to compensate for income and savings losses. And Spectrem Group found that wealthy women reduced debt levels more than men did during the downturn.

Unfortunately, women’s strengths don’t erase the challenges they may face when it comes to money. Mothers and caregivers often have to take lengthy leaves from their careers to care for kids or aging parents, lowering their contributions to employer-sponsored retirement plans and costing them years of the company match. Living longer, they may outlast their funds or spend more time ill. They may also err too far toward risk avoidance. As a result, they need strategies that complement the strengths noted above and offset several distinctive problems.

There’s little doubt that women’s financial behavior and preferences across situations show major differences from men’s. Women’s financial strengths are significant, but so too are their challenges. In the end, this type of careful and informed approach to investing and saving, when coupled with early planning and forethought, can offer a powerful example that all of us could use to better control our financial destiny.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)